Subprime mess surprised Greenspan

Ex-Fed chief didn't realize economic harm of lending practice

JEANNINE AVERSA, Associated Press

Published 5:30 am, Friday, September 14, 2007

WASHINGTON — Even the maestro didn't see it coming.

Former Federal Reserve Chairman Alan Greenspan acknowledges he failed to recognize early on that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.

In an interview, Greenspan said he was aware of subprime lending practices where home buyers got very low initial rates only to see them jacked up later, causing severe payment shock. But he said he didn't initially realize the harm they could do.

"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," he said in a CBS 60 Minutes interview to be broadcast Sunday. "I really didn't get it until very late in 2005 and 2006."

As Fed chief, Greenspan's handling of the economy had earned him monikers, including the maestro, the greatest central banker who ever lived and the second-most important person in Washington.

Yet, some wonder whether the Greenspan Fed could have done more to prevent lax lending standards, bad loans and other problems that have since come to light in the higher-risk subprime mortgage market.

A meltdown in that market has rocked Wall Street. Foreclosures and late payments have soared and lenders have gone out of business.

Sen. Charles Schumer, D-N.Y., said: "Greenspan was one of the smartest regulators this country ever had. If he missed it, then it should be a warning to the current regulators about the depth of this crisis."

Greenspan, who ran the central bank for more than 18 years — the second-longest serving chairman ever — left in 2006. His successor, Ben Bernanke, has had to deal with a credit and financial crisis stemming from the subprime mortgage mess.

When he was at the helm, Greenspan maintained there was little the Fed — which also oversees the safety and soundness of banks — could do about the subprime situation. One of the Fed's governors, however, had raised a red flag about questionable lending practices.

"Well, it was nothing to look into particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," Greenspan said.

Some blamed Greenspan's interest rate policies for feeding the housing frenzy. Sales had hit record highs and house prices galloped from 2001 to 2005. Then the market slumped.

The Greenspan Fed from early 2001 to the summer of 2003 had slashed interest rates to their lowest level in decades. It was done to rescue the economy from the blows of the bursting of the stock market bubble, the 2001 recession, the terror attacks and a wave of accounting scandals that shook Wall Street.

Critics say the Fed kept rates too low for too long.

Greenspan, however, defended the Federal Reserve's actions.

"They are mistaken," he said of the critics. "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low."

Meanwhile, some believe Greenspan would have acted more aggressively than Bernanke in dealing with the current financial crisis.